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Discount Brokerage Weekly Roundup – March 9, 2020

To tear a page out of the Sesame Street playbook, today’s edition of the Roundup is brought to you by the letter V. V is for volatility, V is for vix, V is for virus and V is for volume, and all of those factors are hitting markets, investors and online brokerages hard. And, thanks to daylight savings, all of this is coming an extra hour earlier starting Monday.

In this edition of the Roundup, we take a look at the double-edged opportunity that new customers are bringing to online brokerages in the US, as well as drill into the stats on trading behaviour during the past month and how popular commission-free trading has quickly become. Despite the rocky times, we’ve also got the regularly scheduled comments from investors on Twitter and in the forums.

Time to Get Down

Open up any news provider, tune into any news on TV and panic is everywhere. Funnily enough, while panic ensues, it seems like the rush isn’t only to buy toilet paper at Costco. There also appears to be a crowd of investors rushing back into the stock markets, generating a stampede, it seems, to open a trade with an online investing account.

The first data point showing that investors aren’t running from the market volatility came from an interesting source – the popular zero-commission online brokerage (although aren’t they all now?) Robinhood. This US online brokerage made headlines at the outset of last week for all the wrong reasons, as their trading platform suffered a catastrophic outage smack dab in the middle of a monster rebound day. To make matters worse, the platform was out for the entire trading day and was shaky for a portion of the following day. Before diving back into the stampede of the markets, it is useful to add a bit more context.


When Canadian online brokerages had platform troubles in the early part of 2019 – when the frenzies for cryptocurrencies and cannabis stocks were at a peak – the failure of trading platforms to handle the additional capacity were cited as the cause of the technology challenges. Of course, what happened as Canadian online brokerages – including Canada’s largest bank-owned online brokerages – went offline during trading hours was a predictable recipe of investor frustration that made the news and generated a firestorm which erupted on Twitter.

Fast forward to March 2020 and the outage that hit Robinhood. On a day where the Dow Jones Industrial Average climbed more in one day than at any point in its history, Robinhood’s 10 million customers were left to watch from the sidelines and predictably, the frustration ended up on the news and generating furious tweets on Twitter.

Robinhood or Canada’s online brokerages were not alone in their technical difficulties. Canada’s largest stock market – the Toronto Stock Exchange – suffered a similar fate at the end of February when its market shut down early due to a technical glitch. A week prior to Robinhood, large online brokerages in the US, Schwab and Fidelity also experienced technical glitches to their trading systems.

It begs the question: if online trading venues know that that they are susceptible to surges in volume, wouldn’t they do more to properly prepare? Shouldn’t they know by now that with scalability also comes the responsibility to properly prepare for the volume and volatility that would accompany said scale? Should there be some kind of mandatory government regulation to ensure technology is up to a standard to handle the kind of capacity that can be generated by so many investors?

In a world where commission charges might slow down investors from taking certain kinds of trades, eliminating commission has the unintended consequence of removing any monetary barrier from executing a trade. As such, the decision to cut online brokerage commissions to zero inevitably means that there will likely be an increase in the volume of trades executed and, as such, systems that support online trading will also need to be ready for a commission-free experience.

The real story here isn’t the technical outage per se; it is that, after a long absence from the markets, real volatility appears to have returned and brought with it a flurry of investors wanting to capitalize on it. Yes, falling markets spook investors who may want to sell out of stocks. That said, falling markets also attract in active traders who seek to profit on the accompanying swings in stock prices.

It is that data point that was corroborated by executives from two different online brokerages this past week. The first was Robinhood, who published a written explanation and apology for the outage that took place. Contained in that apology was this interesting set of reasons:

“Multiple factors contributed to the unprecedented load that ultimately led to the outages. The factors included, among others, highly volatile and historic market conditions; record volume; and record account sign-ups (italics added).”

In spite of the uncertainty or perhaps because of it – or perhaps because of the meteoric rise of popular (with millennial investors) stocks like Tesla – Robinhood has seen a flood of new customers join their platform. And they are not alone. Former CEO and founder of Interactive Brokers, Thomas Peterffy, when asked to comment on the recent outage by Robinhood, also disclosed the record numbers of account openings at Interactive Brokers stating, “Account openings have doubled over the past two months.”

Whether it is driven by coronavirus, the new oil price war or general political uncertainty, online investors and online brokerages are confronting a return of volatility. And, although that certainly will be spooking some investors, news from the US online brokerage market is indicating that DIY investors are not shying away from stepping into the markets at this point. Indeed, anecdotal evidence from Canadian discount brokerages this RSP season is that account sign-ups have been strong.

The big takeaway heading into what is sure to be another shockingly volatile week is that online brokerages need to be at their very best – perhaps more so now than at any point in their recent history. Active traders are coming back to the market which means, in spite of the trading commissions here in Canada, there are likely going to be DIY investors jumping in to find beaten up stocks or who can no longer withstand the red in their portfolio of cannabis stocks. With an oil price shock sending another volley of volume and volatility at the technical systems, here’s hoping Canadian online brokerages’ systems can handle what is coming.

Stranger than Friction: Data on Who’s Trading Commission-Free

With all of the other numbers currently flying around headlines and generating investor buzz, online brokerage metrics may not seem like the most exciting place to shine a light. That is, of course, unless you are intrigued by what trends are unfolding with DIY investors.

Again, the US online brokerage market is providing a glimpse into the trends taking shape as market volatility ratchets up and uncertainty as to the economic impact of coronavirus kicks in. As mentioned in the story above, there have been high level disclosures by executives at Robinhood and Interactive Brokers about the nature of the rush of online investors into the market.

With the cycle of a new month beginning, it is particularly useful, therefore, to look at the trading metrics reported by Interactive Brokers and to a lessor degree, Charles Schwab, to provide a more complete picture of the trading landscape.

Starting first with Interactive Brokers’ metrics, there are a few numbers that immediately jump out with respect to performance in February. The first is trading volume – measured in DARTs – which was 32 percent higher in February than January and 63 percent higher than in February 2019. This confirms the observation across markets that trading volume significantly increased in the first two months of the year. And while the vast majority of those trades were in stocks, another incredible stat to take note of was the year over year increase in options contracts (82%) and futures contracts (75%). This is a signal of a more sophisticated investor stepping into the market and certainly a bullish sign for anyone looking to get in front of an active trader.

Another very important number to take note of is the increase on a year over year basis of the number of net new accounts. In February, Interactive Brokers recorded a staggering 104 percent increase in the number of new accounts compared to last year. And, despite launching the free version of their platform – IBKR Lite – there are clearly signs that they are attracting sophisticated traders to their platform who are willing to pay for professional grade trade execution.  This is an important point to highlight as it demonstrates that the value for online investors is going to be driven by their investing style or behaviour, so one size fits all pricing at online brokerages may not make sense in 2020 and beyond.

Data reported by Schwab over the past 13 weeks actually splits out trades by whether they generate revenue or not – something that is somewhat unique compared to other online brokerages.

With this data and with Schwab having offered commission free trading since late 2019, it is now possible to see the trends and shifts in trading behaviour when commission pricing is removed. A three week stretch in February is particularly instructive in that it shows that commission-free trading increased twice as much as did commission-based trading. In terms of the popularity of commission-free trading, in the last week of February, it was 5 times more popular than commission-based trading.

These latest data points suggest that maybe the swings in volatility being seen in the markets might, to some degree, be an unintended result of many more investors having access to commission-free trades and therefore be more willing to take positions (even in the short term) that they might otherwise stay on the sidelines for. That volatility, in turn, attracts in professional and very active investors who are trading and utilizing sophisticated platforms and trading products.

Active traders are enticed by and thrive in volatile markets. Online brokerages make better margins on options trades and selling data feeds and sophisticated trading platforms than they do on stock trades. Could opening up commission-free trading spur volatility and enable active investors to maneuver around them?

As the experiment of commission-free trading continues to play out in real time in the US online brokerage market, there are data points starting to emerge that show more investors are opening online investing and trading accounts and that there is greater activity in times of market volatility. For Canadian online brokerages, despite the market carnage or perhaps because of it, now seems like a very good time to launch features or promotions for active investors or remove commission fees for less active investors. In either scenario, Canadian DIY investors with the stomach to handle the volatility should also be on the lookout for what Canadian discount brokers do to capitalize on this new trading reality.

Discount Brokerage Tweets of the Week

From the Forums

Daze of our Lives

A new-to-the-workforce Redditor takes to the forum for advice on how to set financial goals and invest to reach them in this post. Fellow forum users help him assess his options and put into place a plan to improve his financial literacy for long-term investing.

Young and the Riskless

A financially-savvy forum user worries that his retired parents aren’t getting enough bang for their buck from their broker and wonders if there’s a way to approach them to encourage a change. In this post, Redditors give advice on how to go about communicating these issues and the potential downsides of such a change in retirement.

Into the Close

One wild week deserves another. The very fluid situation in markets, politics, and health have thrown the analysts a lot to try and compute. For many passive investors, this is the exact scenario that a well-balanced portfolio is meant to cushion. For those seeking adventure and fortune in the midst of this uncertainty, however, this appears to be prime time. Whichever you choose to do, hang on, because it’s going to be an exciting week.

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